We Design Your Financial Destiny

(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Don't get conned by the so-called golden investment opportunties

Couple of months back, a reputed company offering wealth management services (especially to High Networth Individuals) approached a friend of mine with an alluring "risk-free" opportunity to earn "high" returns.

The product details were as under:
Instrument : Non-Convertible Debenture
Issuer : XYZ Property Developers Pvt. Ltd.
Security : Secured 2.5 times by the land owned by the company
Interest : 18% p.a.
Tenor : 30 months
Up-front fee : 3%
Listing : Unlisted Private Placement
Form : Physical

When my friend asked my opinion, I straightaway said 'No'. 

The reasons...
a) It was a private limited company. When even the best of the listed companies are having corporate governance issues, it would be foolhardy to trust a private limited company.

b) The issue was not rated by any rating agency. Since, it is strongly advised to give your money to only AAA (or at best AA) rated companies only, investing in an unrated issue is a strict no no.

c) Real Estate sector, as is well known, is facing financial crisis. When RBI is cautioning even banks to be careful about lending to real estate, why should an individual risk his money in such a sector.

d) There was simply no information available about the company or the promoter on the internet. In fact, the company did not even have a website. So how do we know whether we are lending money to a genuine company or not.

e) Security of 2.5 times the value of the issue seemed comforting. However, land faces many issues such as Govt. regulations, unclear titles, litigation, encroachments etc. Therefore, with no authentic details available about the land ownership, it was necessary to be cautious about it.

f) The pre-tax return was 16% after deducting the upfront charges. Further, after paying 30% tax, the effective post-tax returns worked out to only 10.7%. At that time, FMPs were giving a safe and secure 8.5-9%. This, after 10% tax, worked out to post-tax returns of 7.6-8.1%. So the difference in returns wasn't as great as it appeared at first glance.

g) Further, being in the physical form, the tedious TDS was applicable. If it had been in demat form and listed, there would have, at least, been no TDS.

Bottomline : Be very careful and do an extensive study before you trust anyone with your money.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

101 Classic Tips Money Gyaan

You Learn A Lot By READING... And Even More By SHARING.

Share Button

Ignorance is like a SIGNED BLANK CHEQUE... anyone can MISUSE it.

Subscribe via Email
Powered by Blogger.

... Three VALUABLE Tips ...

1. Why Mutual Funds Won't Survive On The Planet Mars
No Mutual Funds on Mars
Mutual Funds would be a totally ALIEN concept on planet Mars.


2. 10 Key Features of 'Standard Individual Health Insurance'
Standard Individual Health Insurance
Salient aspects of the Arogya Sanjeevani Policy.


3. Refinance Home Loan In Early Years (For Maximum Gains)
Loan Refinancing
Think before you make your move to refinance your loan.